All the reasons why fine wines have become an increasingly attractive asset.
by Ludovic Tendron, Chairman and Co-Founder of Vitisasia.
Where to invest one’s money is a difficult question that many individuals have to answer. Like corporates, they are sitting on record cash holdings, many still mistrustful of the banking system and its past excesses.
Recent reforms in the banking sector have not been able to fully rebuild confidence, and concerns about the Chinese shadow banking system will probably not help, either. Today, with interest rates still low, cash strategies are likely to deliver returns below inflation, while central banks continue to inject liquidity into economies to address debt issues.
What should be considered in this context is an asset “having strong long-term capital preservation qualities that will be insulated against both the potential ravages of the economy and, more specifically, against the attack on purchasing power arising from money printing,” as Joe Roseman stressed in his book “SWAG, Alternative Assets for the Next Decade.”
Such an asset would also have to be tangible and not correlated to traditional markets such as stocks and bonds. Very few assets have these characteristics—and fine wines are one of them.
Fine wines are a unique class of asset subject of an increasing demand, finite production, and limited supply. Those that are worth investing in are mostly from France, and production remains strictly regulated in that country. Winegrowers can plant new vines on the condition that they uproot the equivalent. Past vintages inevitably dwindle as bottles are uncorked; a bottle of fine wine from a certain vintage is unique and can never be replaced once opened. The value of fine wines can only be appreciated over time, provided they have been selected well and bought at the right price.
Global demand for fine wines is now driven by emerging markets, led by China, where wine consumption has increased substantially in the past few years. Indeed, China is now one of the top consumers of red wine in the world (a 136 percent increase in the past five years) and the biggest importer of Bordeaux wines. Hong Kong has turned itself into a wine hub since duties on wine were removed in 2008. However, China’s annual per capita consumption is only 0.8 liters, whereas neighbors such as Hong Kong and Japan are 4.3 and 2.4 liters, respectively. This low figure in China shows great potential for the coming years.
The Russian wine market might not be as excited as China’s, but consumption is still set to rise almost 18 percent by 2016. India also has potential, with an expected increase in consumption of 17 percent by 2017.
Some traditional markets such as the U.S. remain thirsty. Americans have now become the biggest consumers of wine—be it still or sparkling—in volume in the world, with more that 300 million liters per year, which is more than in France and Italy.
But not everyone can afford to buy fine wines, which are seen as luxury products. It’s interesting to note that the countries experiencing the highest increase in wine consumption are also the ones experiencing the greatest increase in billionaires (China, India, Russia, Brazil, Hong Kong, etc.). Taking China as an example again, the number of centa-millionaires is predicted to increase by around 105 percent between 2011 and 2016, and China is on the track to become the world’s biggest luxury market, surpassing Japan and the U.S. China will also be contributing 40 percent of the luxury sector’s growth over the next 10 years.
The potential of fine wines as an investment is clearly there, and credit should be given to wine investment. Despite two recessions, a collapse in the banking system, and ongoing concern of sovereign default, fine wines have recorded steady returns over the past decade: 10 percent on average per annum, where bonds and stocks strove to reach five percent.
How Should One Invest in Fine Wines?
Investors must pay a great attention to provenance and storage (including insurance). They should preferably invest in fine wines from excellent vintages that have been well rated by experts.
Wine funds can provide an excellent platform for people wanting to make investments in fine wines without having to worry about questions like which wines to buy, where to store them, what price to pay, etc.
Allocating 5 to 15 percent of a portfolio for fine wines in the coming decade could well be one of the soundest decisions to make in 2014.
“In vino veritas” (in wine there is truth).